TaxTMI 
TaxTMI 
2011 (1) TMI 36
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....ement and commissioning of power plant etc. The assessee while computing its business income had claimed a deduction on account of a sum of Rs. 2,13,96,720/- towards community development and environment monitoring expenses. The assessee explained before the Assessing Officer the purpose for which these expenses were incurred as follows: Environment Monitoring Expenses: 1) Pollution Control and Monitoring Expenses. 2) Horticulture and Poly houses for exotic variety of Flowers expenses. 3) Use of drip irrigation and water harvesting ponds 4) Maintenance of Lawns & gardens in and around the generation plants. Community Development Expenses: 1) Maintenance of Public gardens with displaying of placards of company name to create a positive image. 2) Providing scholarships to deserving students. 3) Providing educational assistance and supply of books, educational materials etc. 4) Organising Medical camps and providing medical aid. 5) Providing sponsorships, 3. The assessee relied on the decision of the Hon'ble Rajasthan High Court in the case of CIT vs. Kamal & Company., 203 ITR 1038(Raj) and the decision of the Hon'ble Gujarat High Court in the case of CIT....
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.... 20 14 20 -DO- 3. A.Y. 2001-02 3 6&7 39 to 40 218/M/05 4. A.Y. 2002-03 7 7 78 3505&3370/M/06 5. A.Y. 2003-04 7 7 78 3506&3371/M/06 6. A.Y. 2004-05 4 12& 13 84 3951/M/07 7. A.Y. 2005-06 3 8&9 89 4164/M/07 Respectfully following the decision of the Tribunal on identical issue we uphold the order of CIT(A) and dismiss ground No.1 raised by the revenue. 7. Ground No.2 raised by the revenue reads as follows: "On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to allow the expenditure on replacement of meters amounting to Rs. 75,32,88,942/- as revenue expenditure." 8. The assessee claimed as deduction a sum of Rs. 75,32,88,942/- being repair to plant and machinery and debited to P&L account and pertaining to electricity meters replaced during the year. According to the Assessing Officer replacement of electricity meters was a capital expenditure and cannot be allowed as deduction while computing the total income. The assessee explained before the Assessing Officer that it had about 2496000 con....
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.... of paperbook No.II 1. A.Y 1999-00 590&436/M/04 2&3 2 TO 11 2. A.Y. 2000-01 590&436/M/04 4&5 11 3. A.Y. 2001-02 218/M/05 1 To 3 69 To 70 4. A.Y. 2002-03 3505&3370/M/06 3 75 5. A.Y. 2003-04 3506&3371/M/06 3 75 6. A.Y. 2004-05 3951/M/07 17 85 To 86 Respectfully following the decision of the Tribunal we uphold the order of the CIT(A) and dismiss ground No.2 raised by the revenue. 13. Ground No.3 raised by the revenue reads as follows: "On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer not to allocate any head office expenses for the purpose of computing deduction u/s. 80 IA in respect of profits of Goa Unit and Samalkot Unit." 14. The assessee company has claimed deduction u/s. 80 IA in respect of the following units. S.No. Name of Unit Nature of business Amount claimed. 1. Samalkot Power Generation Generation & distribution 60,23,11,654 2. GoaPower Plant -do- 10,44,54,415 3. Dahanu Unit-1 Generation 255,25,33,002 4. Dahanu Unit-2 Generation 234,17,....
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....nbsp; Rs. 124,41,90,011 Less:Depreciation as per Books Rs. 1,09,08,188 Add: Depreciation as per IT Act Rs. 1,59,95,347 Less: Loss on sale of assets Rs. 6,394 &n....
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.... Rs. 4605,75,72,959 ================== Proportionate HO expenses in relation to turnover is worked out as Turnover of Unit X Total expenses /Total eligible turnover. HO expenses of Goa Unit: 2242471920 X 124,92,70,776 / 4605,75,72,959 = 60,814,149 HO expenses of Samalkot Unit: 2349814874 X 124,92,70,776 / 4605,75,72,959 = 63,725,209 Accordingly head office expenses of Rs. 12,45,39,358/- was allocated in respect of these two units and 80IA deduction was restricted to Rs. 53,8....
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....opted by A.O for the purpose of computing the deduction u/s. 80IA." 20. The facts and circumstances giving raise to the above ground of appeal by the Revenue are as follows: The assessee is a company. It is engaged in business of generation and distribution of electricity. Originally the company was only in distribution of electricity in the suburbs of Mumbai. Subsequently in A.Y. 1996-97 it had put up a plant for generation of electricity at Dahanu. The company was entitled to deduction u/s 80IA in respect of income from generation of electricity at Dahanu. The relevant section reads as follows: [Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. 80-IA. (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of....
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.... Assessing Officer applied section 80IA(8) which provides that the goods transferred from one business to another business of the same assessee should be at its market value to ascertain the profit eligible for deduction u/s 80IA. The provisions of Sec.80-IA(8) read as follows: Sec.80-IA ( 8) Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date : Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified ....
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....ast assessments of the Assessee was no longer relevant because of the Tariff fixed by the Maharastra Electricity Regulatory Authority (MERC). In exercise of powers conferred by the Electricity Act, 2003, MERC notified the Maharashtra Electricity Regulatory Commission (Terms and Conditions of Tariff) Regulation, 2005 which superseded the MERC (Terms and Conditions of Tariff) Regulations, 2004. Under these regulations, it was mandatory for all power generation and distribution entities to apply for fixation of tariff ultimately to be charged to various consumers. MERC had, for the first time issued a tariff order on1st July 2004which is applicable for financial year 2004-05. Similar for FY 05-06, applicable for AY 06-07, MERC has fixed tariffs vide its order dated3/10/2006. The tariffs are fixed based on two concepts viz., clear profits and reasonable return. A reasonable rate of return is fixed on the capital base. There are principles for determination of capital base. Clear profits are determined by considering the income for sale of electricity, non tariff income and deduction expenses, income tax and allowing some funds for contingency. If the clear profits are more than the rea....
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....propriations. Therefore, the action to restrict deduction u/s. 80IA to Reasonable Return worked out by MERC is totally incorrect as the profits which are eligible for deduction u/s. 80 IA are the profits before tax and before the statutory appropriations (which are not allowed to be reduced while computing profits eligible for deduction u/s. 80IA). b) The above working of Clear Profit and Reasonable Return as given in MERC order are in respect of the combined activity of generation and distribution and the same are not for the generation activity alone. The Assessee pointed that the same would be evident from the item of expenditure which shows "power purchase". The power purchase is from Tata Power Companies (TPC) which was used for distribution of electricity to comsuners in licensed areas. The tariff determination by MERC is for the ultimate price to be charged by the assessee to different type of consumers. Thus MERC order determines the price for activity of distribution of electricity which is either generated or purchased. Therefore, the profits determined by MERC are not for generation alone but generation and distribution as well purchase and distribution. The co....
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....e the profit of the company but is only considered for fixing the Tariff for the subsequent year and in subsequent year the profits will be less on account of lower fixation or tariff and deduction u/s. 80IA will also be lower. The gap between the Clear Profit and Reasonable Return continue to remain with the company. d) The Assessee pointed out that there are 3 different figures of profits: i) Profit as per books of accounts. ii) Profits as computed by MERC i.e. Clear Profit iii) Reasonable Return. The Tariff fixation if done prior to the end of the year will take into account the estimate of revenue and expenditure and will not match the actual. In such an even there will be difference between the actual and the Clear Profits worked out by MERC. There will again be a difference between the Clear Profits and Reasonable Return. Difference between Clear Profit and Reasonable Return are adjusted on a rolling manner in subsequent Tariff. Thus on a year to year basis the Reasonable Return will never be same as the Clear Profits or the Profits as per books of accounts, though the difference is always adjusted in a rolling manner as stated above. Thus the Reasonable R....
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....ngly compute the profit of two generating units Dahanu 1 and Dahanu 2 in the ratio of power generated by them to power purchased from the TPC. The total claim of deduction u/s. 80IA in respect of these units is accordingly computed at Rs. 110 crore. Though, the above method of computation includes distribution profit on self generated power, but considering the fact that assessee is selling power to large number of consumer below the purchase price and the fact that Tata Power Corporation has claimed deduction u/s. 80IA of Rs.37.47 crore on its Trombay unit 7 Power Plant with installed capacity of 180 MW on the basis of reasonable return and deduction as per same rate for Dahanu Power Plants for 500 MW installed capacity would come to almost same amount, the deduction u/s. 80IA of Rs.110 crore in respect of Dahanu Units is reasonable." 27. Before CIT(A) it was submitted that proviso to sec. 80IA(8) can be applied only when computation of profits and gains of the eligible business. In the manner specified in sec. 80IA(8) presents exceptional difficulties. He pleaded that section 80IA(8) required the Assessing Officer to adopt the value of goods transferred from eligible business ....
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....ry appropriations. The entire basis of adopting the MERC order is wrong. The order of the MERC is only for fixing of tariff and reasonable return to be earned and retained by the generating companies. The assessee clarified that clear profit is the profit as per books of the assessee. Reasonable return is worked out @16% on the capital employed. If there is difference between clear profit and reasonable return, it is carried over to the next cycle of tariff fixation. If the clear profit i.e. actual profit as per books is more than the reasonable rate of return the balance is carried over to the next cycle of tariff fixation and tariff is fixed accordingly. So between the two, the correct basis is to adopt the clear profit and not the reasonable return. Further, the clear profit as per books of account is required to be adjusted according to the provisions of the Income tax Act i.e. depreciation as per sec. 32, disallowance u/s.40(a)(ia), 43B etc. The Assessing Officer has wrongly adopted the reasonable return which is the figure after tax thereon and statutory appropriations, without making any adjustment as per the Income-tax Act. In doing so the Assessing Officer has ignored the ....
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....roportionate share of the combined profit worked out by the MERC. It was submitted that as held by the Bombay High Court in the case of CIT vs. Win Lab Ltd., 254 ITR 187, the profit from eligible business is to be worked out considering the method prescribed by section 80 IB(8). The ITAT in assessee's own case has been consistently following the provisions of section 80 IA(8) and has not found the proviso to the said section to be applicable. The assessee objected to the Assessing Officer's reference to the profitability of TPC in respect of their Trombay unit 7 power plant to justify his allocation of combined profit to generation activity at Rs. 110 cores. The assessee submitted that the Assessing Officer cannot rely on the documents of other persons without confronting the said documents to the assessee. In the absence of such documents the assessee cannot comment on the result of the said company. Taking into the entirety of the facts and earlier orders in the assessee's own case, the assessee submitted that the deduction u/s. 80 IA should be worked out by applying the market rate under sub section (8) of sec. 80 IA to the power generated in the generating unit. 31. O....
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.... no difficulty in ascertaining the market price of power as mentioned in the provisions of subsection (8) of sec. 80 IA. The various rates fixed by MERC for different types of producers and consumers is in no way relevant to the issue in had. 33. He was also of the view that even if proviso to sub-section(8) of section 80 IA is to be applied the computation of profits eligible for deduction under section 80 IA had to be done on a reasonable basis. In this regard he held that the reasonable rate of return prescribed by MERC would not be a reasonable basis on which profits of the eligible business can be computed under section 80 IA(8) of the Act. He held that reasonable rate of return is a hypothetical calculation of a percentage of capital employed. The same cannot be considered as income under the Income Tax Act. 33. With regard to the clear profit determined by the MERC order he held that the same is the book profit of the assessee on the basis of company law and is worked out after debiting Income tax and depreciation as per company law. If proper adjustment is made as per the Income tax Act then such profit would be around 334.72 crores. He held that even th....
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....ed at on the basis of applying the rate at which power was purchased by the Assessee from TPC would no longer be relevant after the fixation of tariffs by the MERC. He submitted that MERC is the authority for fixation of tariffs and the basis on which they fix the tariffs is very much relevant for arriving at the profits of the activity of generation of electricity by the Assessee. In this regard it was pointed out by him that "clear profit" and "reasonable return" from the combined activity of generation and distribution inMaharashtrahas been worked out at Rs.266 crore and Rs.210 Crore respectively by MERC. He pointed out that during the previous year the Assessee generated 2250 KWH million and 2073 KWH million from the Dahanu-1 and Dhanu-2 units respectively and purchased 3921 KWH Million from TPC for distributing power to its consumer in Mumbai suburb. The Assessee had paid Rs.1087,55,69,303 for purchase of power from TPC. The Assessee has taken Rs.27,73,673 per KWH million as transfer price to distribution division for its self generated power. The profit shown by these units for deduction under Sec.80-IA has accordingly worked out at Rs.255,25,33,002 and Rs.234,17,58,239. He p....
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....not be a good yardstick for determining the price that would ordinarily fetch in the open market in view of the order of the MERC determining the price at which the service has to be provided by all power generating companies to the ultimate consumers. It was his final submission that the action of the AO was reasonable and had to be restored. 37. The learned counsel for the Assessee reiterated the submission of the Assessee as put forth before CIT(A) and further relied on the order of the AO. 38. We have considered the rival submissions. We have already seen that the Assessee was distributing power prior to its commencing the business of generation and distribution of power. The activity of distribution of electricity was not entitled to the benefit of deduction u/s.80-IA(4) of the Act. In its business of distribution of electricity prior to its activity of generation and distribution of electricity, the Assessee was purchasing electricity from Tata Power Companies (TPC) and distributing it. After the commencement of generation of electricity at Dahanu, the Assessee continued to purchase electricity from TPC as the generation of electricity at Dahanu was only 500 MW w....
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.... issue of average consumer selling price vs TPC price, being the market value as provided in section 80IA(8), was decided by CIT (A). The CIT (A) had upheld the Assessing Officer's order and rejected the Assessee's contention to consider average consumer selling price. Thus the TPC price was considered as market price for the purpose of section 80IA(8). However, the issue regarding disputed standby charges was appealed to the Tribunal. When the appeal was pending, the matter was resolved between TPC and the company and a compromise was reached on the amount of standby charges. The tribunal in AY 2000-01 held that the amount finally settled between the company and TPC should be included for working out the average price paid to TPC and that should become the market value for computing profit of generation unit at Dahanu for the purpose of deduction u/s 80IA. The assessments in the later years was also completed on the same basis as the assessee company accepted the CIT(A) order on the issue of adopting price paid to TPC. Thus the amount on which the Assessee would be entitled to deduction u/s.80-IA(4) was thus determined in the assessment proceedings u/s.143(3) of the Act. ....
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....wed to be reduced while computing profits eligible for deduction u/s. 80IA). b) The profits determined by MERC are not for generation alone but generation and distribution as well purchase and distribution. The combined profits have to be bifurcated between generation activity and distribution activity - distribution of self generated as well as purchased power for the purpose of computing deduction u/s. 80IA. c) The profits of the assessee whether as per books of accounts or as allowed to be computed for the purpose of tariff fixation will match with the Reasonable Return. The exercise of adjusting gap between the Reasonable Return and the profits i,e. clear profits is an ongoing process and the same is either allowed to be recovered from the consumers out of fixation of tariff for subsequent year or the tariff for the subsequent year is adjusted to take care of the excess gap. Thus Clear Profits which are in excess of the Reasonable Return does not cease to be the profit of the company but is only considered for fixing the Tariff for the subsequent year and in subsequent year the profits will be less on account of lower fixation or tariff and deduction u/s. 80IA will also be lowe....
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....ch is also carried on by the Assessee. b) The consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer. c) It is only when condition (b) is satisfied then the Revenue gets a right to determine profits and gains of such eligible business at the market value of such goods or services as on the date of its transfer. Till A.Y. 05-06, the Revenue considered the rates at which power was purchased by the Assessee from TPC as the market value. There is nothing brought on record to show as to how the rates, based on the determination of power tariffs by MERC, is the true market rate especially in the light of the reasons given by the Assessee as to why the said rates do not reflect the correct market rate if applied in the case of the Assessee. In the given facts and circumstances of the case, we are of the view that there is no reason to deviate from the mode of computation of profits eligible for deduction u/s.80-IA of the Act, as was done in the past. 43. We also do not agree with the conclusion of the AO that after the passing of the order by ME....
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.... follows: "Object 8-M: To invest and deal with the moneys of the company in such manner as may from time to time be determined. Object 15: To subscribe absolutely, or subject to any condition or contingency for, or purchase or acquire in any way, any shares, stock, debentures, debenture-stock or other obligations of any other company of any description." The Assessee submitted that considering the above features, the earnings from these transactions should not be classified as capital gains but should be treated as business income. 47. The Assessing Officer however treated the income from sale of units of mutual funds and securities as capital gain. 48. On appeal by the assessee the CIT(A) following the earlier orders of the Tribunal in assessee's own case held that the income in question has to be assessed as income from business. 50. After considering the rival submissions and perusing the relevant material on record we observe that this issue came up before the Tribunal in the immediately preceding year i.e. assessment year 2003-04. The relevant discussion has been made in para 8 of the order and it was finally held that the CIT(A) had cor....
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....come Tax Act 1961 are constitutionally valid; iv)The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (Fifth Amendment) Rules 2008 are not ultra vires the provisions of Section 14A, more particularly sub section (2) and do not offend Article 14 of the Constitution; v) The provisions of Rule 8D of the Income Tax Rules which have been notified with effect from24 March 2008shall apply with effect from Assessment Year 2008-09; vi)Even prior to Assessment Year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section (1) of Section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record; vii)The proceedings for Assessment Year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall deter....
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....sp; ---------------------- Total interest income &n....